Penny-Wise, Pound-Foolish on Unemployment Challenges

Employers have become more aggressive about challenging unemployment claims in a way that threatens to tarnish their appeal to future workers and may be making the current recession worse for workers and companies alike.

About 16 percent of people otherwise eligible for jobless benefits found their claims contested by employers on the grounds of worker misconduct in 2007, roughly double the rate from the early 1980s, according to an analysis of federal data by labor economist Wayne Vroman of the Urban Institute research group. The protest rate is much higher in some states, such as Texas, where employers contested more than a third of otherwise eligible worker claims in 2007 on misconduct grounds, Vroman says.

The increased willingness to fight claims, seen also in data over the past decade on benefit case appeals, has several possible causes. Among these are the use of technology that makes challenges easier, harried corporate HR departments on tight deadlines and the rise of an outsourcing industry that handles unemployment matters for companies.

Growing employer combativeness around benefit claims has likely limited the unemployment insurance taxes paid by businesses and thwarted fraudulent claim attempts. But the challenges to unemployment claims are leaving many former workers embittered in an era when employment horror stories can echo quickly across the Internet.

And although the rate at which employers succeed in their misconduct protests hasn’t changed significantly, the greater aggressiveness is dissuading people from even applying for benefits and ultimately decreasing the share of the unemployed getting weekly checks, Vroman says.

That means more people without much money to spend—a problem that exacerbates downturns and helped spur the creation of the unemployment benefits program in the first place back in the Great Depression.

When fewer out-of-work people get jobless benefits, "it goes against the purpose of unemployment insurance," Vroman says.

Despite the potential drawbacks to unemployment challenges, observers don’t expect employers to ease off their protests.

Coleman Walsh, chief administrative law judge at the Virginia Employment Commission, says employers in an economic slowdown are more likely to terminate marginal performers. These cases, he says, tend to lead to disputes over whether the "poor performance" amounted to misconduct, which disqualifies a worker from getting unemployment benefits. "During recessionary times, we tend to see more job performance-related cases," Walsh says.

Incentive for employersBusinesses largely shoulder the burden of the unemployment insurance program, which paid out an estimated $34.9 billion in benefits in the year ended September 30. The effective federal unemployment tax rate generally has been 0.8 percent of the first $7,000 paid in wages to each employee annually—for a maximum federal tax of $56 per employee per year.

A firm’s state unemployment tax, though, can vary based on the amount of unemployment its former workers experience. The so-called "experience rating" system rewards employers with stable employment through lower tax rates, while companies with many layoffs face higher rates.

This year in California, for example, an employer’s state unemployment tax rate can range from 1.5 percent to 6.2 percent of the first $7,000 paid in wages to each employee. For a 10,000-employee firm, that translates to a difference of nearly $3.3 million annually.

Employers, therefore, have an incentive to contest the unemployment claims of their former workers. And they have been doing so with greater zeal in recent years.

Once a worker loses their job and applies for unemployment benefits, the most recent employer is contacted and given a chance to protest the claim. Since the early 1980s, the rate at which state unemployment agencies make “determinations” about whether an otherwise eligible claimant is disqualified from benefits because of job misconduct has nearly doubled, to 16 percent, Vroman found. He says the vast majority of those determinations involve employers contesting the employee’s benefits.

While employers are alleging employee misconduct during initial claims determinations at a greater rate, they still lose on those matters roughly two-thirds of the time, Vroman says.

Increased aggressiveness on the part of employers also can be seen in statistics about appeals of claims decisions over the past decade or so.

The Department of Labor provided a set of data that offers an approximation of the initially approved claims that are appealed by employers each year. This data set considers the number of employer-filed appeals as a percentage of the number of monetarily eligible claimants—that is, the number of people who had adequate work and wages to qualify for benefits. From 1998 to 2002, that percentage was as low as 2.68 percent and never higher than 3.28 percent. From 2003 to 2007, the percentage was never lower than 3.76 percent and as high as 4.6 percent.

Although claimants still account for the majority of appeals, the share of appeals by employers has crept up during the past several decades. It averaged 30.1 percent of appeals from 2003 to 2007, up from 28.7 percent from 1998 to 2002.

The percentage of time that employers win their appeals has edged up, but not by much. The win rate averaged 33.4 percent from 1998 to 2002 and 34 percent from 2003 to 2007.

The consolidation of corporate human resources departments over the years, combined with tight deadlines, may contribute to the trend, says Doug Holmes, president of trade group UWC-Strategic Services on Unemployment & Workers’ Compensation. Large organizations may not have time to meet initial state response times—often just 10 calendar days from when the notice of an unemployment claim is mailed—given the way HR-related documents these days are routed to central offices, Holmes says. That could lead to more appeals.

"The short time frame makes it difficult to get a quick, upfront decision in these cases," says Holmes, whose organization includes employers and aims to be the voice of business on unemployment matters.

The growing use of technology in the system also may be fueling challenges, Holmes says. "It could be because of increased automation of claims," he says. "If employers can file an appeal online, it’s easier to file an appeal."

A shift in the courts also may play a role in persuading employers to appeal more often. Court rulings have slowly expanded the definition of employee misconduct, says Rick McHugh, a staff attorney for the National Employment Law Project advocacy group.

"The courts are just not showing as much sympathy for employees who get fired," he says.

Observers also point to the rise of third-party firms that manage unemployment compensation costs for employers. Monica Halas, a senior attorney at nonprofit group Greater Boston Legal Services, says that in her experience representing lower-wage claimants, outsourcers sometimes act in bad faith during unemployment insurance proceedings.

"This includes providing wrong information to initial claims adjudicators and appealing cases that have no merit and then often not showing up at the hearing," she says.

Walsh of the Virginia Employment Commission says employers for the most part are not bringing frivolous challenges. But he says most employers that appeal claims these days seem motivated by newfound awareness about the way unemployment claims affect their tax rate. And he chalks up that mentality to the outsourcers.

"My sense is the third-party agencies are educating employers more as to what the real cost of unemployment insurance is to their business," Walsh says.

Outsourcing the disputeOne of the biggest outsourcers in the field is Talx, a unit of credit-rating firm Equifax. Talx has 7,400 customers of unemployment claims management services. It claims on its Web site to "remove over $6 billion in unemployment claim liability annually and recover $240 million in erroneous charges for our clients."

"We take the situation on a case-by-case basis," Dear says. "It’s really of no benefit to protest something where the facts wouldn’t support it."

Talx represented Wal-Mart in an unemployment benefits case last year involving former employee Lucia McDermott, who worked in a Semmes, Alabama, Wal-Mart store for about 4½ years and was granted benefits after being terminated May 23, 2008. Wal-Mart appealed the decision, accusing McDermott of misconduct. On April 24, McDermott had come to work at 1 p.m. instead of 11 a.m. as originally scheduled. Although Wal-Mart considered her tardy, McDermott says she had been told to come in later, and that she was fired because of a personality clash with an assistant manager.

An Alabama administrative hearing officer upheld McDermott’s benefits. "It seems unreasonable that the employer would wait a month later to terminate an employee for an incident of tardiness," the officer wrote. "No reasonable explanation for the delay had been offered."

With employers protesting more benefit claims, the number of employees left angry is bound to multiply. And those disgruntled folks are bound to start blasting their former firms on blogs, Facebook pages and other corners of the Internet, says Jennifer Benz, a communications consultant based in San Francisco.

Stories alleging that a company kicks ex-employees when they’re down could damage an employment brand, Benz says.

"An employer who treats current and former employees badly during this recession is going to put itself at a significant disadvantage when the economy perks back up," Benz says. "Their reputation and employer brand will be damaged and they’ll lose key talent and have a harder time attracting top employees."

Apart from potentially harming corporate reputations, employer aggressiveness on unemployment claims also threatens to exacerbate the economic downturn, Vroman argues. He says a high level of employer challenges is associated with a lower share of the unemployed receiving benefits.

In 2007, employers protested 34 percent of otherwise eligible claims in Texas on misconduct grounds, Vroman says. That was about twice the national average, he found. In the fourth quarter of 2007, the state’s recipiency rate, which captures the percentage of unemployed people who have qualified for and are claiming benefits, was 20 percent. The national recipiency rate was 36 percent.

A high level of employer protest effectively dissuades workers from applying, Vroman says. If you see your friend’s attempt to claim unemployment fail, he says, "you may not bother to file your claim."

Gone too far?No one disputes that employers should contest the claims of workers who don’t qualify for unemployment benefits. Such protests are key to preventing fraudulent claims. And during a recession, low tax rates are good for individual businesses and the overall economy, which benefits from the presence of healthier employers.

Vroman, though, says there’s typically a lag of a year between a claim and any impact on the employer’s tax rate. He adds that unemployment taxes represent a small fraction of employer payroll costs.

The issue boils down to whether employers are going too far with their challenges, risking the common economic good and their own good name.

Benz cautions businesses against benefit-claim protests that are penny-wise but pound-foolish: "Companies need to have a long-term view about their employees and how they’re managing their workforce."

Update: April 1, 2009This story has been updated since its original publication. One source for the story on the level of employer challenges of unemployment benefits, Wayne Vroman, a labor economist with the Urban Institute research group, revised his analysis after the story was edited for publication. Vroman originally provided overall employer protest rates to Workforce Management. But he later said he was not sure about one component of the overall rate. Vroman initially indicated that the component, the rate of employer protests on the grounds of voluntarily quitting, made up close to 10 percent of the overall rate nationally in 2007. He later said he was not sure what that figure is.